Retirement Guys: What the debt deal means to investors

Envision a scene of an old town in the Wild West. The dry desert heat is everywhere and at first glance it appears the town is empty except for two guys standing out in the street. One might think it is Clint Eastwood or Billy the Kid. Yet, upon looking closer it’s just Porky Pig and Wile E. Coyote on the other end of town, getting ready to face off in a shootout, waiting for the other to draw. Porky’s stutter makes it hard for him to talk intelligently while the Coyote has his next best contraption, which never really works, in his pocket. A similar standoff is happening right now in real life as Republicans versus Democrats square off over raising our national debt. We’ll let you be the judge of which one is Porky Pig and which one is Wile E. Coyote. The important part of this battle is to not get caught in the crossfire.

Looking at the website www.usdebtclock.org, everyone should be concerned as our national debt has grown from $5.7 trillion back in July 2000 to more than $14.5 trillion today. And our current unfunded liabilities are now more than $114 trillion dollars when you consider Social Security, the Prescription Drug Program and Medicare. This is now more than $1 million in liabilities per taxpayer. Even for those who pay no taxes, it is time to take notice as it could be a long-term burden for all Americans.

Short-term, don’t make an emotional move. A common question we have been hearing lately from investors is, “Should we get out until they figure this all out?” Our answer is to be rational, not emotional, when it comes to making financial decisions. According to Dalbar Inc., a company that studies investor behavior versus stock market performance, history has shown making emotional decisions cost investors substantially.

“For the 20 years ending 12/31/2009 the S&P 500 Index averaged 8.2 percent a year. The average equity fund investor earned a market return of only 3.17 percent.” Remember, if an investor listens to the news headlines, there is always a reason to buy or sell, avoid this emotional urge.

Ask the right questions. Investors often focus only on the bottom line. Although the bottom line is important, understand what the objective is. Let’s say a retiree has plenty of cash to cover current income for the next several years, plus money set aside for a pay raise in the future. The stock market ups and downs of today become less relevant. In contrast, a younger investor saving and investing for the future could look at a stock market decline as a buying opportunity. Remember buy low and sell high.

Focus on what you can control, although it is important to stay up-to-date and involved in our national economy it is often beyond an investor’s control. Every American should vote and voice their opinion to our political leaders. Don’t dwell on what you can’t control; instead, focus on your financial situation. Get out of debt, minimize taxes and make every dollar saved work in the most efficient manner.

Long-term, watch out for tax increases. Only 43.4 percent of Americans had to pay any taxes in 2010 according to the Tax Policy Center. They go on to point out by looking at history, “between 1950 and 1990, the number of owe-no-money federal tax returns averaged 21 percent.” According to the IRS’s own research if every U.S. taxpayer who filed a tax return paid $100 in taxes in 2008 an additional $5.2 billion in taxes would have been collected. Taxes could have a bigger impact on more people in the future and be at a higher rate for current taxpayers. Have a plan today for tax increases in the future and talk with an accountant about how an increase could affect you.

Take a moment and step back. Look at what the plan is, nationally and for yourself personally. Realize the difference between what can and cannot be controlled. Make decisions based on facts that are consistent with the long-term plan and avoid the urge to make gut calls when investing. As Warren Buffett said, “Your money is like soap, the more you touch it, the less you have.”

For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc nor its representatives provide tax advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH-43537. (419) 842-0550.